RBA Unchanged but interest rates rising

The RBA has left the cash rate at 1.5% for almost two years and is not expected to lift it until mid-2019.

Craig at HQB Financial Solution has a keen interest on interest rates which is a hot topic for investors relying on interest cash flow to some point. Click here to discuss the content of this article here

Here we survey market developments and note: 1) the interest rates businesses face have risen; and 2) that there has been a reduction in the cost of fixed hedging.

• BBSY moving independently of the RBA cash rate

The 3 month interest rate (BBSY) has risen by 30bps since mid-February and at 2.15% is now 60bps above the cash rate – Chart 1. This initial rise in BBSY reflected technical factors in the US money market which spilt over to Australia – this spill-over happens because Australian Banks need to partly fund in US money markets. More recently, BBSY has stayed high even as US money market pressures have eased somewhat. This suggests factors peculiar to Australia and of a more permanent nature may be at play — like regulatory changes. Looking ahead, it’s possible that BBSY pulls back in the months ahead but we don’t expect it will be by much. Moreover, as we near the time the RBA will lift their cash rate target, the market will anticipate this and reflect it via a higher 3 month rate. For now “market pricing” for the RBA is modest, with just 22bps of hikes priced over the 18 months to December 2019

Longer term interest rates rising in line with globe Further along the yield curve, the benchmark 3 year fixed swap rate (which most business and mortgage fixed rate loans are priced against) has risen 65bps from its low point in mid-2016. As chart 2 illustrates, this reflects the ongoing rise in global interest rates: With around half of the bonds issued by the Australian Government, banks, and corporates being owned by foreigners, as global rates rise, ours tend to also. Over the past year or so, the central bank in the UK has tightened by 25bps, in Canada 75bps and the US Fed by 175bps. More modest lifts to these and others countries cash rates are likely ahead.

Continue to the full article published by National Australia Bank NAB July 2018